If it sounds too good to be true, that’s because it is for all but a few people. We were surprised when this developer said it to us like that, but then he clarified exactly how it’s possible for a small group of people. This guest article by Brad Roemer offers a peek into the world of the infamous 1%.

First, Some Background About Myself

I graduated from the University of California, Davis with a Bachelor’s Degree in Business Administration and Management, which doesn’t really lend itself to real estate on its own. But I had strong summer internships during my time at the university and was hired right after graduation at a company called REO Homes. For two years I was an Analyst for that company, and i worked mainly on Distressed Real Estate debt refinancing. I had a good mentor that taught me the ins and outs of the real estate industry as best he could. Eventually I left for a better opportunity at RLO Development, and have been there for the past eight years. At RLO, I analyze prospective value-add investment opportunities in real estate as well as opportunities to build new properties from the ground up.

So The Bad News Is It Only Really Applies To A Small Group Of People

This isn’t something that you can do just like that. It takes years and years and you need to be well off to begin with. But I’ll tell you how it’s done either way.

The Strategy

I’ve been working at the firm for quite a while and we sometimes underwrite commercial real estate loans. We have a few regular families that borrow from time to time to work on new development projects and this is how they do it. The investor would start out with a small loan and work closely with the firm. They rarely, if ever, over leverage. They always act responsibly. Over time they tend to involve their children into the development projects that they work on with us. Some 20-30 years later they are still working with just us. Literally the same institution over many generations. And they always make their interest payments on time. Without fault. They establish this long term track record and we start to extend the same trust towards them. So even if the borrowers have low credit scores like a 650, we don’t care, because with us they have always done well and because they keep giving us new business generation after generation. The downsite for you if you were to do this is that if you default on your loan or miss a payment, you will have undone 20 or 30 years of hard work by previous generations in your family. And you will not be able to go to any other lender because you have no such history with them.

I was very skeptical in the beginning of this kind of lending, but after some research I found that our default rate was 1.13% compared so some of our peers that had it at 1.25%. Turns out that lending based on relationships is quite safe, especially if they are 20-30 year old multigenerational relationships. So that’s how these people get fixed rates in the low single digit percentages for multimillion dollar deals, even with a low credit score. Long lasting multigenerational relationships.